The World Orange Juice Industry

The World Orange Juice Industry By Allen Morris, June, 2012 Birth of Today s Citrus Industry There are over 100 countries that grow citrus fruit, but the largest three, Brazil, China and the United states, account for almost half of world production (Exhibit 1). Oranges are the predominant citrus fruit grown, accounting for almost two-thirds of production and over 80% of citrus processed in the world (Exhibits 2 and 3). Christopher Columbus brought the first oranges to the New World on his second voyage in 1493, and early Spanish settlers planted orange trees around St. Augustine, Florida in the mid- 16 th Century. Florida s sandy soil and subtropical climate proved ideal for growing citrus. By the 19 th century, citrus trees grew wild through many of Florida s forests, and groves were cultivated along major Florida rivers. Florida s annual commercial citrus production grew to five million boxes by 1893. Improved transportation opened new markets in the northeastern United States, and by 1915 production reached 10 million boxes. Exhibit 2. World Citrus Production 2.3 Billion 90-LB. Boxes 26% 8% 6% Oranges Are The Most Important 62% Oranges 62% Tangerines 20% Lemons/Limes 12% Grapefruit 6% The discovery of how to make frozen concentrated orange juice in the late 1940 s by the U.S. Dept. of Agriculture and the Florida Dept. of Citrus provided juice that tasted almost as good as fresh squeezed, but was more convenient to make. Between 1945 and 1960, Florida orange production more than doubled as growers tried to keep up with the rapidly growing demand created by the new frozen concentrated orange juice (FCOJ). A devastating freeze in 1962 cut Florida orange production in half, which was the largest reduction in fruit production since the discovery of frozen concentrate. This was a shock to the increasingly market-oriented citrus processing sector as orange juice supplies became inadequate to meet market demand and prices skyrocketed. It soon became evident that it would take years to restore damaged tree inventories. Major Florida processors went in search of foreign sources of orange juice supplies, and found the potential to develop them in Brazil. Brazil had a thriving 1

orange industry that produced for the fresh market, a climate that rarely experienced freezes and that produced a juicy orange. Meanwhile, the greatly increased prices led Florida growers to begin planting trees at an unprecedented rate. And the citrus industry we know today was born. Exhibit 3. World Citrus Processing 662 Million 90-LB. Boxes 8% 5% 6% Most of Citrus Processed is Oranges Oranges 81% Lemons/Limes 8% Grapefruit 5% Tangerines 6% 81% World Orange Juice Industry Overview Production of the world s 1.7 billion 90 pound boxes of oranges among the 118 countries in the world where they are grown is both concentrated and fragmented (Exhibit 4). The largest two, the U.S. and Brazil, grow 40%. Adding the next largest three, India, China and Mexico, brings the production share of the largest five orange producers to 62%. Yet it takes another 113 countries to produce the other 38% of the world s oranges. Orange juice (OJ) production, however, is not fragmented among countries. The dominance of the U.S. and Brazil as orange producers is based on their dominance as orange processors. Together they account for 88% of world OJ production (Exhibit 5). Exhibit 4. World Orange Production Shares 118 Countries Grow 1.7 Billion 90-Lb. Boxes 38% 7% 9% 28% 6% 12% Source: Food and Agriculture Organization of the United Nations Brazil USA Mexico India China Other 113 Orange juice production is more geographically limited in scope than many other commodities. Juice oranges require a tropical or sub-tropical climate. Temperatures of 27 degrees F. for 6 hours or more can damage oranges and 22 degrees F. for 6 hours or more can kill trees. Well-drained soils are also required. Standing water for more than 72 hours can damage or kill orange trees. And for quality juice oranges, a humid climate with relatively warm nights and 2

Exhibit 5. Brazil and U.S. Almost 90% Of World Orange Juice Production 5% 4% 3% 58% 3.1 Billion Single Strength Equivalent (SSE) Gallons 30% U.S. 30% Brazil 58% EU-27 5% Mexico 4% Other 3% frequent rains during fruit growth periods are required. Finally, the country must have the economic infrastructure to support commercialscale agribusiness. Juice orange groves reach optimum economies of scale at over 1,000 acres in size. Only Brazil and Florida, which represents 95% of OJ production in the United States, currently meet all these requirements. Although in 1960 Brazil only produced 14 million boxes of oranges compared to Florida s 88 million, by 1970 orange production in Brazil had increased to 44 million boxes, and by 1980 it had increased to 155 million boxes, compared to Florida s crop of 207 million boxes at that time. The post 1962 Florida freeze efforts of large processors to expand Brazilian supplies and of Florida growers responding to high prices had dramatically increased world orange juice supplies. By 1980 Florida was still over half of world orange juice production, but Brazil, undisturbed by freezes, was rapidly gaining ground. Four freezes in Florida during the first half of the 1980 s cut Florida s production in half, sending prices to unprecedented levels. By 1985 imports of Brazilian orange juice accounted for half of the U.S. orange juice market, emphasizing the importance of Brazil as a significant source of orange juice supplies when Florida s crop was inadequate to meet demand. By 1987, Brazil accounted for a larger share of world orange production than Florida, and by the 1990 s Brazil accounted for over half of world OJ supplies. Although by the beginning of this century Florida s freeze-damaged orange production had recovered, it never came close to catching up with Brazil and probably never will (Exhibit 6). Exhibit 6. Brazil Overtook the U.S. as the World s Largest OJ Producer 60% 50% 40% 30% 20% 10% 0% 1980 1991 2001 2011 Source: USDA, Foreign Agricultural Service USA Brazil Other World OJ markets are primarily industrialized countries such as Western Europe, the U.S., Canada, and Japan. The U.S. and Europe currently account for 90% of the 3.1 billion gallon world OJ market (Exhibit 7). The European OJ market originated as a market of primarily juice blends and nectars (juice beverages with sugar and water added). Most U.S. OJ production was needed for the growing U.S. market and Brazilian processors had contractual and price incentives to supply their U.S. customers in the event of a freeze in Florida. With no significant domestic supply of OJ, no stable supply for Europe existed. Thus, with juice blends and nectars, the content of OJ in 3

consumer products was varied up or down in response to supply availability and price. But by the 1990 s this situation was changing. With lower production costs than Florida, primarily due to lower land and labor costs, Brazil has grown into a very large and low cost orange juice producer, with enormous processing and storage infrastructure, a fleet of ocean going vessels dedicated to the low cost worldwide distribution of bulk orange concentrate, and storage facilities strategically located in the northeastern U.S., Holland, Belgium, the U.K. and Japan. The resulting increased availability of orange juice and lower orange juice prices led to an increase in orange juice available for world markets and to an increase in 100% orange juice products in Europe. The result has been dramatic growth in the European orange juice market, more than doubling its consumption and increasing from 24% of the world market in the early 1980 s to 48% currently, exceeding the U.S. share of 42% (Exhibit 8). The U.S. market also grew during the 1990s and orange juice markets began to emerge in newly industrializing countries such as Korea, Hong Kong, Taiwan and Singapore. Exhibit 8. Europe is World s Fastest Growing OJ Market 70% 60% 50% 40% 30% 20% USA Europe Other 10% 0% 1983 1993 2004 2011 4

Production The United States Oranges are grown commercially in Florida, California, Arizona and Texas, but Florida accounts for 75% of U.S. orange production (Exhibit 9). California is a distant second with about 24% of production. However, California is the predominant fresh orange producer in the U.S., accounting for over 80% of production (Exhibit 10). Florida s dominance as an orange producer is based on its dominance as an orange processor. Florida s climate produces a much juicer orange than California. Consequently, Florida juices 95% of its oranges compared to California s 20-30%, and Florida accounts for 95% of domestic U.S. orange juice production (Exhibit 11). Exhibit 9. U.S. Orange Production Shares by State Exhibit 10. Orange Production For The Fresh Market In The USA Texas & Arizona 1% California 24% Texas & Arizona 3% Florida 14% Florida 75% California 83% Source: USDA, Florida Agricultural Statistics Service Exhibit 11. Florida s Dominance As A Citrus Producer Based On It s Dominance As An Orange Juice Producer California 5% Florida 95% In response to freeze risks, Florida s orange production has moved southward. Drawing an eastwest line across Florida that defines south as everywhere south of the Polk County/Highlands County line, in 1970, 63% of Florida s orange trees were north of this line. By the 1990s, over 70% of Florida s orange trees were south of this line, which is still true today (Exhibit 12). 5

Exhibit 12. Increased Grower Consolidation Orange production is different on the poorly drained flat woods soils that characterize this southern area compared to the well-drained sandy soils of the more northern ridge area. An intricate network of ditches, canals and reservoirs are required to drain this land for groves, and this fixed cost changes the economies of scale of citrus production. While a 50-acre grove on the ridge can be economically efficient, larger groves are required to cover the cost of the drainage infrastructure on these southern flat woods soils. Thus it is no surprise that the typical citrus grower in this region is a large well-capitalized agribusiness firm. Costs and the U.S. Orange Juice Tariff Most newly planted groves today are replanted groves, either from a grove already owned by the grower doing the replanting or one purchased from the over 100,000 acres of currently abandoned groves in Florida. Including a land value of $3,000 per acre, it costs about $11,000 to re-establish the grove (Exhibit 13). That includes tree removal and land preparation, cost of a new irrigation system (not including wells), permits and fees, tree cost and planting, and caretaking the grove through four years of age. This compares to about $6,000 in Brazil, which has experienced rapid increases in the price of agricultural land in recent years (Exhibit 14). Brazilian farmland in prime agricultural areas is now over $3,500 per acre. 6

Exhibit 13. Establishment Costs For a Florida Orange Grove ($ Per Acre) Land Cost 3,000 Land Preparation 2,160 Cost of Trees 1,782 Planting 416 Grove Care (4 Yrs.) 3,478 Total Establishment Costs 10,836 Source: University of Florida Citrus Research and Education Center Exhibit 14. Establishment Costs For a Brazilian Orange Grove ($ Per Acre) Land Cost 2,630 Machinery Operation 999 Labor 762 Inputs (fertilizer, chemicals) 1,108 Management 483 Total Establishment Costs 5,982 Source: GCONCI Currently (2011), it costs $1,888 per acre to grow oranges in Florida (Exhibit 15). Of that, the costs to manage greening are $563. Adding pick and haul costs ($2.48 per box) and the Florida Department of Citrus advertising tax puts Florida s break even cost for growing oranges at $1.10 per pound solids. Brazil s break-even orange production costs are $.911 per pound solids (Exhibit 16). Adding only a 10% return to the investment in grove infrastructure, not including land, brings those break-even costs to $1.25 for Florida and $1.06 for Brazil (Exhibits 15 and 16). Exhibit 15. Cost of Producing Oranges for Processing in Southwest Florida For The 2010/11 Season Cost $ Per Box Per Lb. Solids Per Acre Weed Control.435.070 195.91 Spraying (a) 1.386.220 623.76 Fertilizing.795.126 357.62 Pruning.076.012 34.02 Tree Removal/Replace.401.064 180.25 Irrigation.494.078 222.27 Canker Control.071.011 31.77 Greening Inspections.122.019 54.82 Overhead.418.066 187.84 Total Growing Costs 4.196.666 1,888.26 Interest on Investment.968.154 435.80 Pick, Haul, DOC Ass. 2.708.430 1,218.60 Break-even Cost 6.904 1.096 3,106.86 Total Cost 7.873 1.250 3,592.66 HLB & Canker Costs 1.191.189 536.12 (a) Includes cost of enhanced foliar nutrient spray program. Source: University of Florida, Citrus Research and Education Center Exhibit 16. Orange Production Costs in Brazil For The 2009/10 Season Growing Cost $ Per Box Per Lb. Solids Per Acre Labor.451.075 115.00 Machinery Operation 1.170.195 298.35 Fertilizer.790.132 201.45 Pesticide.900.150 229.50 Other Inputs.059.010 15.05 Management.416.069 106.08 Total 3.786.631 965.43 Interest on Investment.880.147 224.40 Harvest & Haul Costs Labor 1.527.255 389.39 Machinery Operation.153.026 39.02 Break-even Cost 5.466.911 1,393.84 Total Production Costs 6.346 1.059 1,618.24 Sources: USDA, Foreign Agricultural Service; Various Brazilian Growers Note: Effect of crop fluctuations removed from Brazilian costs per box and per lb. solids The U.S. orange juice tariff was initiated with the passage of the Smoot-Hawley Act (Tariff Act) in 1930, before citrus concentrate had been developed. The Tariff Act imposed a tax of 70 cents per single strength gal. on imported OJ (Exhibit 17 ), probably several times as much as it cost to produce oranges and canned orange juice in Florida at that time. The citrus tariff remained unchanged until 1947 when the General Agreement on Tariffs and Trade (GATT) talks occurred in Geneva, Switzerland. There it was reduced to 35 cents per single strength gal. ($.34 per lb. 7

Exhibit 17. History of the U.S. Orange Juice Tariff Year Concentrate NFC $ Per SSE Gal. 1930-1947 0.70 0.70 1948-1994 0.35 0.20 1995 0.3415 0.1969 1996 0.3324 0.1893 solids) for concentrate and 20 cents per gal. for chilled single strength juice, still probably more than it cost to produce oranges and orange juice at that time. 1997 0.3237 0.1855 In 1963, the Kennedy administration attempted 1998 0.3150 0.1817 to pass legislation that would reduce and 1999 0.3059 0.1742 2000 Onward 0.2972 0.1704 possibly eliminate duties on imported citrus Notes: (1) SSE is single strength equivalent (2) The concentrate tariff can be converted to Dollars Per Lb. Solids by dividing the tariff Per SSE Gal. by 1.029 of Solids Per Gal. Source: Florida Department of Citrus, 2009 products. Florida Citrus Mutual (Mutual) battled against this legislation for 4 years and the duty was maintained. Later, in 1970, the U.S. government again tried to reduce citrus import tariffs. American citrus growers had operational costs that were four times higher than their counterparts. Thus, a reduction in tariffs would have rendered them helpless in the international market. Mutual fought against this tariff reduction and won. A U.S. Customs ruling in 1980 brought a decade full of legislative victories for Florida citrus growers. U.S. Customs ruled that processors couldn t convert imported FCOJ into single strength orange juice in a Class 8 bonded warehouse in order to pay a lower tariff. If processors had been allowed to continue this practice, growers would have lost an estimated $300 million a year. Soon after, the U.S. Department of Commerce discovered that the government of Brazil had provided illegal subsidies to growers as well as FCOJ exporters. The U.S. Department of Commerce then forced these companies to pay additional countervailing taxes on exports to the U.S. Three Brazilian producers protested this accusation, but Mutual fought back and the U.S. International Trade Commission ruled to uphold a countervailing duty on Brazilian FCOJ exports. Brazil once again attempted to bypass the tariff legislation and was discovered to have been dumping FCOJ under the fair market value in the U.S. The U.S. Department of Commerce forced exporters from Brazil to pay an additional duty bond on FCOJ. An international trade court then ruled on an anti-dumping order that required continued surveillance of Brazilian prices. This was done in order to protect U.S. citrus growers from Brazilian exports being sold at less than fair market value. The battle for the protection of the citrus tariff continued at the Uruguay Round Tariff and Non-Tariff Measure Negotiations. Though they threatened to reduce the citrus tariff, Mutual combated the reduction and citrus products were excluded from tariff reductions. Trade negotiations continued in the 1990 s with the advent of the North American Free Trade Agreement (NAFTA). NAFTA s primary goal was to establish free trade between Mexico and the U.S. Also, during this time, the U.S.-Canada Free Trade Agreement sought to eliminate tariffs between Canada and the U.S. Mutual fought against the effort to eradicate tariffs and was victorious when the Generalized Agreement on Tariffs and Trade upheld the tariff on imported 8

citrus. Though NAFTA was finally passed during the 1992-93 season, it included special provisions for citrus. These provisions granted a 15-year phase-out on import tariffs as well as a snapback provision in which tariffs are reinstated if there are considerable shifts in price and import volume. Tariffs also suffered a gradual decrease as a result of the Uruguay Round Trade talks in 1994. It was negotiated that FCOJ and NFC tariffs decrease in equal increments, finally totaling 15%, after a period of 6 years. Inflation and trade negotiations have reduced the U.S. FCOJ tariff by 50% since 1980 (Exhibit 18). During that same period, orange production costs in Florida increased from $.69 to $1.10 per lb. solids, while in Brazil they went from $.40 to $.91, increases of 59% and 128%, respectively (Exhibit 19). Much of this increase occurred since 2002-03, and was the result of increased energy costs, increased fertilizer costs and costs to battle HLB. Exhibit 18. Impact of Inflation on the U.S. Orange Juice Tariff Year FCOJ Tariff NFC Tariff Current 1980 $ Current 1980 $ 1979-80.34.34.20.20 1983-84.34.32.20.19 1987-88.34.30.20.18 1992-93.34.28.20.17 1996-97.32.24.19.15 2000-01.29.23.17.13 2003-04.29.20.17.12 2008-09.29.18.17.10 Exhibit 19. Delivered-In Processed Orange Production Costs Season FLORIDA BRAZIL Grow Pick & Haul Total Grow Pick & Haul Total $ Per Lb. Solids 1979/80.453.242.694.268.136.403 1983/84.521.253.775.267.139.406 1987/88.456.268.724.250.124.374 1992/93.462.291.753.344.121.465 1996/97.414.282.696.389.133.523 2000/01.435.324.759.336.089.425 2003/04.368.327.695.332.096.428 2008/09.696.375 1.070.502.223.725 2010/11.666.430 1.096.911 Note: Effect of crop fluctuations removed from Brazilian costs per box and per lb. solids Brazil s orange production costs ranged from 52 to 83% of Florida s over this 1980-2009 period. However, once the U.S. orange juice tariff is added to Brazil s production costs, they ranged from 95 to 120% of Florida s (Exhibit 20). Thus, the tariff protects Florida growers and processors now about as well as it has over the past 30 years (Exhibit 21). Costs in Brazil increased 80% between 1980 and 2009 compared to 54% in Florida, offsetting the erosion of the tariff by inflation. 9

$/Lb. Solids Exhibit 20. Orange Production Costs in Florida and Brazil With The U.S. Tariff Season Florida Brazil Total Delivered-In Costs Total Delivered-In Costs Plus Tariff $ Per Lb. Solids 1979/80.694.743 1983/84.775.746 1987/88.724.714 1992/93.753.805 1996/97.696.833 2000/01.759.715 2003/04.695.718 2008/09 1.070 1.015 2010/11 1.096 1.201 Note: Effect of crop fluctuations removed from Brazilian costs per box and per lb. solids Exhibit 21. Trends in Delivered Orange Costs for Florida (U.S.A.) and Sao Paulo (Brazil) 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 1979/80 1983/84 1987/88 1992/93 1996/97 2000/01 2003/04 2010/11 Florida Sao Paulo Brazil With Tariff Sao Paulo Brazil Without Tariff 10

The Orange and Orange Juice Price Determination Process World Market In the world market, OJ is priced in U.S. dollars. Once applicable tariffs are paid and it enters a country, OJ is priced to consumers in that country s currency. Changes in foreign currency exchange rates to the U.S. dollar have the effect of price changes for OJ imports. A weak foreign currency to the U.S dollar has the effect of a price increase, while a strong foreign currency to the U.S. dollar has a price decreasing effect. Superimposed on that is different sensitivities by country to price changes (different price elasticities). For example, a 10% price increase for European OJ imports reduces consumption by over 20% while a 10% OJ import price increase for the U.S. market reduces consumption by less than 10%. This has been convenient when there was a supply disruption such as a freeze in Florida or drought in Brazil. The resulting higher prices would reduce European OJ consumption and Brazil would divert those exports to the less price-sensitive U.S. market. Also, a stronger European currency to the dollar can mitigate part or all of this price increase and it has sometimes. With the increasing prevalence of contracted OJ export volumes for Europe, this process is now less pronounced as it is limited to spot market exports. The orange and OJ price determination process in the U.S. can be categorized as short-term price changes and long-term cycles. Short-term price changes usually occur within a year or year-toyear, while long term cycles are changes in price levels of trends that cover a number of years. Short-Term Price Changes Short-term price changes are usually the result of weather-related crop fluctuations or temporary changes in OJ demand. For example a mild freeze in Florida or poor bloom and fruit set that reduces the orange crop by 10-20% or a supply reduction in Brazil that reduces available OJ imports can temporarily increase prices. A recession that reduces consumers incomes or perceived OJ contamination such as the carbendazim issue can temporarily reduce demand. In response to these types of situations, OJ processors and marketers balance their inventories/supplies with demand by changing prices. Sometimes several price changes during a season may be required. Long-Term Price Cycles Long-term price cycles are changes in price levels due to an imbalance in citrus production capacity and demand. They can be caused by oversupply, such as in the late 1990s and early 2000s, or by reduced demand relative to supply as is occurring now. An imbalance in citrus production capacity and OJ demand will be corrected by prices. Low prices will lead to reduced plantings and increased consumption, while high prices will lead to increased plantings and reduced consumption. The high price part of a long-term cycle usually lasts about 8-10 years, because that s how long it takes for the high prices to stimulate new plantings and for those new 11

plantings to increase production by enough to reduce prices significantly. The low price phase can last much longer, particularly if demand is too weak for lower prices to increase consumption enough to increase fruit prices, or another supply-disruption large and permanent enough to increase price levels takes longer than 8-10 years. Historical Florida Processed Orange Price Cycles The 1960s and 1970s: In 1962, a devastating freeze killed orange trees, reduced supplies and dramatically increased prices. These high prices led to an over-expansion in world orange production as a result of ambitious planting activity in Florida and the emergence of Brazil as an OJ supplier. By 1970 plantings in both Florida and Brazil resulted in their largest orange tree inventories in history. The 1970 s were a period of rapid growth in OJ production and lower prices. Increased supply availability, lower prices and increased marketing efforts to sell those supplies led to substantial U.S. OJ market growth. The U.S. market grew by 68% between 1970 and 1979. The 1980s and 1990s and early 2000s: Freezes in the 1980s that cut Florida orange production in half, from 207 million boxes in 1979/80 to 104 million boxes in 1984/85 were the final event that sent prices at grower, processor and retail levels skyrocketing. The demand-enhancing efforts of the 1970s and early 1980s had culminated in increased demand in an environment where Florida citrus tree inventories and thus production capacity became drastically reduced. These higher prices, again as in the 1960s led to tree replanting and new planting that by the early 1990s had, once again, created the largest orange tree inventory in history in both Florida and Brazil. By the mid- 1990s supply had increased to a level that pushed prices to or below break-even costs. For example during the high price phase of the cycle (1981-1991) the highest processed orange price was $1.69 per pound solids and the lowest was $.98. During the low price phase of the cycle (1992-2004), the highest processed price was $1.07 per pound solids and the lowest price was $.68. The time period since 2004: The failed canker eradication program, HLB and an a-typically high priced real estate market drastically reduced Florida s orange production capacity. Orange tree inventories have been reduced from 86 million trees in 2002 to 63 million trees currently, and the orange production base has declined from 230-240 million boxes to 140-150 million boxes. Prices again increased dramatically, but compounding effects of declining OJ demand and increased Brazilian orange production are reducing orange prices. The high orange price since 2004 was $2.11 and the low price was $1.07. An imbalance in citrus production capacity and OJ demand will always be corrected by prices. The market seeks an equilibrium between supply and demand where the price generates a competitive return on investment. That return must be at a level that provides the incentive for producers to commit the capital and take the risk to grow citrus. 12